Are there any safe haven investments left?

After nearly a decade of low interest rates and central banks pumping money into financial markets traditional safe haven investments have become expensive, so where could investors look to keep their investments safe?

14/07/2016

David Brett

Investment Writer

Gold, the US dollar, “defensive” stocks such as utilities and pharmaceuticals, government bonds, cash, what do they have in common? In times of economic stress and market turmoil, they are seen as safe havens for investors.

The fear driving investors

Investors were already cautious and snapping up safe haven assets before Brexit, but the result has greatly increased concerns. They fear:

A recession in the UK

A slowdown in Europe and the global economy

A break-up of the EU

Increased global political risk

There is no doubt that these scenarios are all possible, but by flocking to traditional safe havens in such huge numbers investors are paying a high price for protection:

In the UK, if you want to put your money into a government bond for 10 years, the government will pay you just 79 pence a year for every £100 you lend it.

In Germany, investors have to pay the German government to own its bonds. A German 10-year bond yields -0.2%.

We are currently in the second longest stockmarket bull run in history and gains have been driven primarily by defensive stocks, which has arguably made them expensive.

The shares of household goods firm Unilever, for example, are valued at a multiple of 22 times the company’s earnings. The shares of Reckitt Benckiser, a similar company behind brands such as Cillit Bang and Calgon, have a price to earnings ratio1 (P/E) of 29, according to Bloomberg data.

Both stocks have surged in recent weeks and their valuations compare to a forward 12-month P/E of 15.5 times for the FTSE All-Share, according to data from Peel Hunt.

Paying the price of safety

It is a high price to pay for the feeling of security. It has happened because, in a world of economic uncertainty, the money pumped into financial markets by central banks via quantitative easing (QE) has been invested in the highest quality assets first.

From there, the slew of central bank money has trickled down the investment pyramid into lower quality assets as investors have gone in search of higher returns.

Chart: QE: the fountain of money

Source: Schroders. For illustrative purposes only

But paying such a high price for protection in traditional safe havens is a risk in itself.

Like buying a house at the top of the market there is the risk that the price can’t go much higher. Even worse, if the scenarios described above fail to come to fruition prices could fall sharply.

While traditional safe haven assets may provide some protection for your investments in times of economic and financial strife, they all currently carry risk because of their high prices.

Is it worth paying such a high price for an asset that yields less than the interest you can get in your bank account and could fall dramatically if investors’ worst case scenarios don’t unfold?

Where are the safe havens now?

Options for safe haven seekers are very limited.

Gold remains the ultimate safe haven as it is seen as a store of value. The price tends to rise at times of uncertainty and when there is a threat of inflation.

The price of bullion has soared 9% to $1,366.33 an ounce since the EU referendum. But it offers no income.

What else to consider?

The rush to safe havens may have created other opportunities in areas previously considered risky: cyclical shares (shares where the prices are particularly affected by ups and downs in the overall economy).

If the economy recovers or the fears of investors don’t materialise then there is a strong argument that cyclical share prices will rise sharply.

If investors’ fears do come true then those cyclical shares don’t have too far to fall. They also pay healthy dividends, so they could provide an income greater than is available in more traditional safe havens.

For instance, financials are currently the cheapest sector in the MSCI World Value Index according to their price-to-earnings valuation and also offer a dividend yield of more than 4%, four times the yield on a UK government bond. Share prices in this sector have been very volatile.

Graphic: Which MSCI World sectors pay the most divdends and are cheapest on P/E valuations?

Source: Schroders, Bloomberg as at 6 July 2016. MSCI World Value Index.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

1. Price-to-earnings: the price investors are willing to pay for the asset compared with the value of company’s assets. The lower the number, the cheaper the shares.↩

The information on this website is intended solely for use by Singapore residents.

The funds mentioned are Singapore- authorised and recognised funds registered for sale or purchase in Singapore. By proceeding you are representing and warranting that you are either resident in Singapore or the applicable laws and regulations of your jurisdiction allow you to access the information. In particular, the information is not for distribution and does not constitute an offer to sell or the solicitation of an offer to buy units in Schroder funds in any jurisdiction where such activity is prohibited including the United States of America.

The contents on this website are for information only and without consideration given to the specific investment objective, financial situation and particular needs of any specific person. You may wish to seek advice from a financial advisor before purchasing units of any Schroder fund. In the event that you choose not to seek advice from a financial advisor before investing in any fund, you should consider whether the fund selected is suitable for you.

Past performance and any forecasts are not necessarily indicative of future performance. The value of units and the income from them may fall as well as rise. The funds are subject to investment risks. You should read the relevant prospectus obtainable from this website before investing.

The material and information on this site is current at the date of publication and is provided on an "AS IS" basis and without without any warranties of any kind, either expressed or implied.

To the best of the knowledge, information and belief of Schroder Investment Management (Singapore) Ltd ("SIMSL"), all information contained herein is accurate as at the date of publication. However, SIMSL or its affiliates or any director or employee of SIMSL or its affiliates cannot and does not warrant, guarantee or represent, either expressly or by implication, the accuracy, validity or completeness of such information.

Under no circumstances may the information contained herein, or any part thereof, be copied, reproduced or redistributed without the express permission of SIMSL. SIMSL or its affiliates, any directors or employees of SIMSL or its affiliates shall not be liable for any damages arising from any person's reliance on such information and shall not be liable for any errors or omissions (including but not limited to errors or omissions made by third parties) in such information. The information provided herein is subject to change without further notice.

Schroder Investment Management (Singapore) Ltd is regulated by the Monetary Authority of Singapore and is a member of the Investment Management Association of Singapore (IMAS).

We use cookies to help improve your experience with this website. By using this site, you agree that we may store and access cookies on your device. Cookies are small text files, downloaded onto your device, that tell us which pages you've visited, when and what your technology preferences are. To find out more about the cookies that we use, their purpose and how you can manage them, please visit: How we use Cookies

MSCI Disclaimer

Source: MSCIThe information obtained from MSCI and other data providers, included in reports available from this website, may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information and that of other data providers is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling or creating any MSCI information (collectively, the “MSCI Parties”) and other data providers, expressly disclaim all warranties (including, without limitation any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party or other data provider have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.